Card Payment Risk

What are Card Payments?

Card payments use credit card networks like MasterCard, Visa, EMV, American Express and others to process transactions. Unlike ACH, card payments (also known as acquiring) is capable of giving you failure notices in realtime in almost all circumstances. However, there are some scenarios, known as chargebacks that can take up to 120 days.

Based on the reason for failure, the receiving bank can have up to 120 days to fail or chargeback a transaction. This means, if you released an Interchange credit instantly to your user, you might still receive a failure notice (also known as a Chargeback) up to 120 days later.

Pre-Auth vs. Force Post

A card transaction has two parts. When the Cardholder uses their card at the time of their purchase, the merchant verifies the Cardholder's account is authorized for the amount being purchased with the Issuing Bank. This is called a pre-authorization.

The Force Post is the second and final part of the transaction. This occurs when the merchant requests the dollar amount of the purchase and receives the money. Typically, the time span between the pre-auth and the Force Post is one or two business days.

Force Post Risk: Restaurants and other merchants often use Force Post transactions that have a different amount than the pre-authorization. For example, you are at a restaurant and the bill for your meal is $50.00. The restaurant runs a pre-authorization against your card account for the $50.00. However, at the table, you are feeling generous and add a $50.00 tip. In this case the pre-authorization is for $50.00, but the force post is for $100.00 which might exceed the limits of the cardholder's account.

Force Posts can also be recurring. For example the cardholder uses their card to auto pay their monthly Spotify subscription each month. In this case there is no additional pre-auth. The monthly fee is automatically Force Posted to the card account each month.

Typical fraud scenarios add a "significant" force post tip such as $500.00 or more. The Issuing Bank and the Platform are required to pay the full amount, even if this exceeds the limits on the card account.

Negative Balance Force Post Risk: When the card account is a Debit Card or Secured Credit Card, the net result can be that the Force Post actually exceeds the available balance of the underlying account; thereby resulting in a negative balance. In these cases, the Platform can attempt a chargeback to the merchant to recover the funds with varying degrees of success. If the funds cannot be recovered, the Platform is responsible for any shortfall, which will be taken from the Platform's Loss Provision account.

Card Processing

Card processing presents both return and chargeback risk, which are different types of returns. An interchange return refers to a transaction being rejected by the network when it is unable to be processed for a variety of reasons. Meanwhile, chargebacks take place when a transaction occurs and settles, but a user disputes the transaction with the card issuer.

Card returns don’t create direct financial risk to platforms because transactions are immediately rejected and funds are sent back to the user in real time. Nevertheless, it's good practice for you to build logic to keep track of card returns, Mbanq has found that successive returns can be a red flag for future chargebacks and/or fraudulent activity.

High chargeback rates can potentially lead to substantial fines by card networks, inclusion on the Terminated Merchant File for up to 5 years (a list of merchants deemed high-risk by card networks), and/or suspension from the card networks.

Chargebacks also present financial loss risk as any negative balance, resulting from chargebacks will be reconciled from the platform’s reserve account.

Disputing a Chargeback

Reg E (Debit Card) and Reg Z (Credit Card) set forth time limitations for disputed transaction investigations. Financial institutions may take up to 120 days to investigate the reported dispute/error. During the beginning of this period, you have the option to submit evidence against the dispute. See Disputes Common examples of evidence are email communication & interactions, shipping verification, phone call transcripts, live chat transcripts, social media interactions, and similar.

Due to the zero-liability policies of card networks (e.g. Visa, Mastercard), if the transaction is proven to be unauthorized you will have to pay the amount of the chargeback (i.e. the funds the platform received plus the interchange fee of the original transaction), regardless of whether they believe the transaction is fraudulent or not. The end user will receive credit for the transaction.

An exception to the zero-liability policies would occur if there is evidence that the user was grossly negligent or if there was a substantial delay by the user in reporting the unauthorized transaction to its card issuance institution. Evaluating when this exception applies will be at the discretion of the card networks, platforms can submit evidence prior to evaluation of their case.

Provisional Credits

If you are going to issue Debit Cards to your users, then you also need to consider the financial risk of issuing provisional credits. Since you will lose many disputes, these credits are a source of financial losses for all platforms providing card products. Most card transactions that are disputed, are entitled to a provisional credit.

To learn more about Card Disputes and Provisional Credits, See the Card Disputes Guide.